France, Germany seek common position on EADS-BAE

Gernot Heller, Julien Ponthus

5 Min Read

BERLIN/PARIS (Reuters) - EADS Chief Executive Tom Enders reported progress in political negotiations over its mooted $45 billion merger with BAE Systems on Wednesday as France and Germany sought a common position on a deal likely to reduce their influence over the aerospace firm.

A file photograph shows a member of staff working in the cockpit of an aircraft on the Eurofighter Typhoon production line at BAE systems Warton plant near Preston, northern England September 7, 2012. REUTERS/Phil Noble

Word of the deal to create the world’s biggest defense company leaked last week, setting in motion not only turbulent trade in the shares of the two firms but a flurry of response from government officials across Europe.

German Chancellor Angela Merkel said she planned to discuss the matter with French President Francois Hollande at a meeting on Saturday.

High-level preparatory talks are set for Thursday and Friday, with one German source saying a “pre-decision” for a common position with France could be taken at those talks.

HSBC has been selected to advise France, sources familiar with the matter said, in a sign that concrete plans are taking shape even though no political decision has yet been made.

While government officials seem to see benefits in creating a company that would have far more weight on the world stage, there are concerns that too many demands from politicians could scupper the deal.

Enders in a letter to staff on Wednesday made plain that getting the politics of the deal right was critical.

“We are currently in constructive and advanced discussions with all relevant governments and are trying to accommodate their concerns and national security interests,” he said.

“Good governance is a key prerequisite for both companies, it’s the ”go“ or ”no go“ for this project.”

Sources familiar with the discussions earlier this week said EADS and BAE Systems could walk away from the deal if governments ratcheted up their demands, but there were few signs of the tensions which have accompanied a turbulent decade for EADS.

Strategic involvement in Airbus parent firm EADS EAD.PA by the French and German governments in the past has sparked concern about undue influence over issues including where factories are built and where jobs are created.

With Europe’s financial crisis squeezing defense budgets, Enders said it was important for EADS to widen the scope of its defense business, a move it could accomplish be teaming with BAE BAES.L.

The merged firm would overtake U.S. rival Boeing BA.N as the world’s biggest aerospace and defense company in sales.

GERMAN JOBS

Merkel’s coalition government has not yet come up with a unified position on the talks, though some German politicians want guarantees for German jobs and to see some activities headquartered in Germany.

“It cannot be that a Franco-British company is created out of a Franco-German company,” Joachim Pfeiffer, a spokesman for Merkel’s CDU party told Reuters.

He said it would not be acceptable for the merged company to base its commercial activities in Toulouse, France, and its defense operations in London.

EADS employs almost 50,000 people in Germany at 29 sites. German media reports this week that Enders offered job guarantees to the group’s 20,000 defense workers have been dismissed as “nonsense” by officials and by EADS.

NEW PROSPECTS

EADS joining with BAE would mean dissolving a cumbersome shareholder pact dictating that the percentage of shares held by German and French investors be equal.

For France though, combining the firms could result in France seeing its influence in EADS drop as its stake in the combined group would shrink to 9 percent from 15 percent.

Currently, the German government does not hold a direct stake in EADS, but is in talks to acquire a 7.5 percent holding from carmaker Daimler DAIGn.DE through state development bank KfW.

These talks have stalled, a German government source told Reuters. However, if France holds on to its stake in a merged group, then Germany would likely strive for the same.

EADS and BAE have said they will offer the governments of France, Germany and Britain a “golden share” in the new company, which sources say is aimed at preventing a hostile takeover.